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Tuesday, November 20, 2012

European bankruptcies versus Chapter 11

I am no expert on bankruptcy laws but I do remember the general principles of bankruptcy laws in Austria and Germany from recent experience and those of the American Chapter 11 from distant experience. To make it easier, I will refer to them simply as 'Europe' and 'America'. In principle, I think the ultimate focus of Europe is to primarily protect the interests of the creditor and of America to primarily protect the interests of the debtor.

As a company gets into financial trouble in Europe, the creditors get involved. Not all creditors, that is. Typically it's only the banks. The first thing which banks do is to confirm and/or strengthen their existing position: where they have collateral, they make sure that all documentation is in order; where they have no collateral, they attempt to obtain some (all the way to a floating charge on all assets). And when it comes to the Fresh Money requirement, banks hesitate because they are fearful that it might be 'throwing good money after bad'.

In America, control over the company goes to a trustee. The first thing which happens is that service of bank debt will be put on hold. Then, all litigation against the company is stayed or put on hold. A new loan made to a 'Chapter 11 company' is super-senior to all other debt. Thus, it is fairly easy to obtain financing for the Fresh Money requirement.

The idea behind both bankruptcy philosophies is undoubtedly to maintain a 'going concern'. Never is damage greater than when a debtor has to be liquidated. Europe goes about achieving that goal by focusing more on the creditor' interests, America does the oppositve. My own experience is that better long-term solutions typically come about when one focuses on the debtor' interest (provided that the debtor justifies that).

It seems to me that the Greek debt has so far been managed very much along European philosophies. The American philosophy would be more like saying: 'Let's do everything to make the debtor strong, even if it costs us interest income in the short term. If and when the debtor has made it, we'll sit down with them and negotiate a restructuring of debt'.

2 comments:

I have been involved in only one bankruptcy = a well-known, 55 year old professional company that in fact had no debt and one small overdraft facility. Through the coincidence of non-payment of fees on a huge public sector job and one huge private sector job (the client eventually declared bankruptcy) the company was left funding its payroll & expenses itself. By the end of the first year the company was unable to service its VAT and taxes which were based on invoices issued, not fees received.

The company could have survived one non-payment, but not both. It downsized dramatically, re-located, eliminated the overdraft and sold its few non-essential assets.

In fact the banks were helpful and supportive. The culprit was the government in which one branch wouldn't pay, and another was chasing the company through the courts for massive tax payments on fees it had not received. This culprit was totally unwilling to square the circle.

The struggle to survive continued 4 years, until - on the advice of its lawyers and the bank - the company declared bankruptcy.

A very greek bankruptcy. Culprit: government. 2006. Fees still unpaid.

"It seems to me that the Greek debt has so far been managed very much along European philosophies. The American philosophy would be more like saying: 'Let's do everything to make the debtor strong, even if it costs us interest income in the short term. If and when the debtor has made it, we'll sit down with them and negotiate a restructuring of debt'."

IF this is a good way of thinking and acting: what are the results? Economy is not flourishing there. And if this is not because of what you explained, what is influenzing the results negatively of what might be the best way?

I liked your proposal of some days ago, where the Greek debt is postponed. A wonderful humanitarian and economical healthy idea.

I hear in "the Greek house" here the sound of feeling pity that in the news of this morning there is the message that there is not the expected (read wanted) money transfer to Greece. Not yet.

For me it feels as excellent however, because, in my opinion, it is dangerous to nourish a sick system. Money does not bring solutions, not ONLY money. Yes, maybe for a year. And within a year all is gone again. Result: a poor Europe, a poor Greece and who will help Greece then?Greece has to be compared with a teenager who wants a car to drive with and not having a driving license. How to explain that they need to study the rules first? Teenagers know all better than their parents. Even better as their teachers. They can everything. They manipulate and smile and promise and when you turn your back they do it as they want. Doing everything that God has forbidden (in a way of speaking). I like it that Europe shows strength.

I read in your blog (if I remember it well) about a Marshall plan.That is in my opinion the best investment to help.Greece needs help.Compared with MSF=Doctors Without Borders: doctors from everywhere help where needed, in the right way with the right people and the right insight. The organisation is not giving money to the local shamans.

I do not trust shamans, I do not trust the Greek leaders, I do not trust the Greek way of organizing, I do not trust the Greek systems.It leaks, if it is there, but mostly there is not even something.

I feel a very strong power in me, connected with "Europe" and its leaders, to wait till the moment is there that it is clear that the Greeks really know where they are talking about and how to build up Greece, with a controlled control system. till the moment is there that their bad habits and bad traditions, their sick systems, have been completely eliminated. My trust in Greeks is completely dead.I want true doctors there to heal all what is ill.